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What's the problem?

Dang went through each of the company's operating segments on the conference call to drill down into why the company expects a negative impact to earnings despite the noticeable improvement in oil prices. She started by saying that,

Now let me give you a little bit more granularity on our expected performance for the full year versus our budget. We expect natural gas pipelines to come in approximately 2% below its budget, primarily as a result of the lower volumes in our midstream groups and 4.5 months in service delay on our EEC, SNG pipeline expansion. As a result of the delay in receiving our FERC certificate.

In the natural gas segment, weak prices to start the year have had a notable impact on midstream volumes, which the company expects to continue because drillers have yet to signal a real willingness to ramp production. Meanwhile, the construction of the company's Elba Express Company (EEC) Modification Project and the Southern Natural Gas (SNG) Zone 3 Expansion project was delayed due to permitting issues. That said, the company received those permits in early June, which puts it in the position to have the projects in service by the end of the year. http://ir.kindermorgan.com/press-release/kindermorgan/kinder-morgan-projects-receive-ferc-authorizations

Next, Dang said that,

CO2 is expected to end the year on its budget and essentially here what's happening is we've had some price help and cost savings that are offsetting a little bit lower oil and CO2 volumes than we budgeted.

While the carbon dioxide segment remains on budget, this is actually a bit of a disappointment. That's because weaker volumes have completely offset the positive impact from higher oil prices. What's happening here is that the company is drilling less prolific wells than it had been drilling in prior years, which is causing weaker production results.

Next, she noted that,

We currently expect terminals to end the year about 4% below its budget, primarily due to the impact of the coal bankruptcy.

The bankruptcy filing of three large coal companies over the past year is hurting the company's terminals business. Last quarter, for example, those bankruptcies cost the company $19 million in earnings versus the year-ago period. Given the current conditions in the coal sector, these profits will not come back anytime soon.

Finally, Dang noted that,

We expect products to end the year approximately 5% below its budget, due to lower crude and condensate volumes on KMCC, Double H and Double Eagle, lower rates on our SFPP pipeline.

The overall weakness in oil prices is projected to drive down volumes on several of Kinder Morgan's crude pipelines. That is noteworthy because its oil volumes were up 11% last quarter, due in part to higher volumes on KMCC. However, the steep decline in spending by oil companies over the past two years is projected to cause U.S oil production to decline by nearly 1 million barrels per day this year. The bulk of this decline is coming from the Eagle Ford and Bakken, which is bad news for Kinder Morgan because that's where KMCC, Double Eagle, and Double H operate.

Investor takeaway

An improvement in the oil prices over the past few months is starting to fuel some optimism in the oil market. Unfortunately, Kinder Morgan does not share this optimism. That is because it does not see those higher prices fueling higher volumes on its pipelines. Instead, it sees those weaker volumes, as well as several other issues, pulling earnings down below its initial expectations.

Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries: Follow @matthewdilallo